Correlation Between Merck and Canadian Western

Can any of the company-specific risk be diversified away by investing in both Merck and Canadian Western at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Merck and Canadian Western into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Merck Company and Canadian Western Bank, you can compare the effects of market volatilities on Merck and Canadian Western and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Merck with a short position of Canadian Western. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Canadian Western.

Diversification Opportunities for Merck and Canadian Western

-0.73

Correlation Coefficient

Merck  Canadian Western

Pay attention - limited upside

The 3 months correlation between Merck and Canadian is -0.73. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Canadian Western Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Canadian Western Bank and Merck is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Merck Company are associated (or correlated) with Canadian Western. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Canadian Western Bank has no effect on the direction of Merck i.e., Merck and Canadian Western go up and down completely randomly.

Pair Corralation between Merck and Canadian Western

Considering the 90-day investment horizon Merck Company is expected to under-perform the Canadian Western. In addition to that, Merck is 1.02 times more volatile than Canadian Western Bank. It trades about -0.19 of its total potential returns per unit of risk. Canadian Western Bank is currently generating about 0.03 per unit of volatility. If you would invest  3,935  in Canadian Western Bank on September 20, 2024 and sell it today you would earn a total of  84.00  from holding Canadian Western Bank or generate 2.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Merck Company  vs.  Canadian Western Bank

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Canadian Western Bank

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Canadian Western Bank are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable fundamental drivers, Canadian Western is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Merck and Canadian Western

The main advantage of trading using opposite Merck and Canadian Western positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Canadian Western can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Canadian Western will offset losses from the drop in Canadian Western's long position.

The idea behind Merck Company and Canadian Western Bank pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.